Report: Proposed Carbon Tax Would Damage U.S. Manufacturing Sector

The National Association of Manufacturers (NAM) released a study today warning about the potential damaging impact of a carbon tax on U.S. manufacturers.

With the U.S. government running deficit close to a trillion dollars, there has been a great deal of chatter in Washington about a carbon tax – a direct tax on the carbon content of fossil fuels (coal, oil and natural gas). Proponents say a carbon tax makes sense to raise revenue and clean up the environment. The tax would cause the negative effects of emissions to be priced into products. According to the Congressional Research Service (CRS), “A carbon tax could apply directly to carbon dioxide (CO2) and other greenhouse gas (GHG) emissions, or to the inputs (e.g., fossil fuels) that lead to the emissions. Unlike a tax on the energy content of each fuel (e.g., Btu tax), a carbon tax would vary with a fuel’s carbon content, as there is a direct correlation between a fuel’s carbon content and its CO2 emissions.”

The carbon tax is attractive for some policymakers because it would apply across the economy, would promote the use of clean energy and would result in significant revenues to help reduce the deficit. (CRS conducted a study where it found that “imposing an escalating fee that starts at $20 per metric ton could reduce the projected 10-year budget deficit by more than 50 percent, from $2.3 trillion to $1.1 trillion.”)

Not so fast, says NAM. A carbon tax “would have a devastating impact on manufacturing” says the trade group. The NAM report,Economic Outcomes of a U.S. Carbon Tax, “found that levying such a tax would result in a substantial impact on jobs and higher prices for natural gas, electricity, gasoline and other energy commodities. As a result, manufacturing output in energy-intensive sectors could drop by as much as 15.0 percent and in non-energy-intensive sectors by as much as 7.7 percent.”

According to NAM:

The study examines two carbon tax scenarios: one levied at $20 per ton increasing at 4 percent annually and the other designed to reduce carbon dioxide (CO2) emissions by 80 percent. In both scenarios, a carbon tax would lead to lower real wage rates because companies would have higher costs and lower labor productivity. Over time, workers’ incomes could decline relative to baseline levels by as much as 8.5 percent. The increased costs of coal, natural gas and petroleum products due to a carbon tax would ripple through the economy, resulting in higher production costs, less spending on non-energy goods, fewer jobs and slower economic growth.